‘The impact of electricity prices most hurt aged pensioner households – but their spending habits and general lack of a mortgage meant overall they actually did better than others.’
Photograph: Alan Porritt/AAP

The release of the latest cost of living indexes shows that for all types of households the cost of living continues to grow well below long-term averages. But in September the impact of electricity price rises most affected aged pensioner and other government beneficiary households. For these households, who have mostly missed out on the benefits of falling interest rates, it means that they remain the most affected by cost of living pressures.

Unlike the consumer price index, which provides an estimate of average price increases for all Australian households, the quarterly cost of living index acknowledges that different households have different spending needs.

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While the CPI does differentiate between households in each capital city, the reality is the spending patterns of household with two working adults with two kids varies little regardless of where you live. But the spending patterns of that household would be greatly different to that of two aged pensioners living together – even if they lived right next door to the family of four.

So while increases in electricity, food etc will vary across the nation, the impact of those changes will also vary dependent upon your situation in life – both in terms of work and age.

The cost of living indexes also take into account the change in the cost of paying off a mortgage, whereas the CPI does not – instead it looks at the price of buying a new home for owner occupiers.

The ABS breaks down cost of living according to four types of households – employee, age pensioner, other government recipients, and self-funded retirees. Since 2007 it has also included an average of the first two – “pensioner and beneficiary households” – known as the “PBLCI”, which is used in the indexing of the age pension and some other government benefits.

In September, the cost of living for all households except pensioners rose by more than the CPI, with households of non-aged pension benefits being hit the hardest:

The cost of living for age pensioner households rose just 0.5%, and was up only 1.7% over the past year – less again than the 1.8% increase in the CPI.

For the first time in the past year and a half, the cost of living for aged pensioner households rose by less than employee households.

The reason is that age pensioner households spend more of their budget on food and non-alcoholic beverages than the average family, and that group of items dropped in price in September – led by a 10.9% drop in vegetables.

Eating your greens like your grandma told you to certainly was a boon for your wallet in the past three months:

Age pensioner households also spend less on tobacco than other households, though a bit more on alcohol. In September, the price of tobacco went up 4.1% while alcohol only rose 0.5% (and the biggest price increase was beer with 0.9%). So non-smoking, vegetable eating and wine drinking households did well.

But using electricity hit everyone, and in this regard pensioner households spend more of their money than most. Such households spend 3.4% of their weekly budget on electricity compared to just 1.9% for employee households. This is due to a few factors, but mostly that while employee households might use more electricity because on average their households are bigger, they also have more money to spend.

Similarly, pensioners are more affected by property rates because these are relatively fixed – people living in two same sized houses next door to each other will pay similar council rates regardless of the income of the occupants.

And because employee households are much more likely to be ones with a mortgage, those households on average spend much more of their weekly budget paying interest than other households who are more likely to be renting or have paid off their house:

This is why since the end of 2011, when the RBA began to cut rates, the cost of living for the average employee household has risen by less than the CPI:

Since September 2011, the CPI has risen 11.6% and the RBA’s underlying inflation measure has gone up 13% but the cost of living for employee households has risen just 7.1%. By contrast, the cost of living for age pensioner households has risen 10.5% and households of other government benefits by the most at 11.4%.

And to give you a sense of how important falling interest rates have been, if we excluded the impact of insurance and financial services charges, the cost of living for employee households in that period would have gone from 7.1% to 8.8%:

But in the past nine months, those payments have been rising:

The cost of living figures show that, as with inflation, we are living in very slow growth times. The increase in electricity certainly had an impact, but the slow growth or fall in prices of other items means cost of living generally is growing much slower than it has in the past.

The impact of electricity prices most hurt aged pensioner households – but their spending habits and general lack of a mortgage meant overall they actually did better than others.

While over the past five years the biggest driver of the low growth in the cost of living has been falling interest rates, the end of that benefit appears to be in sight. Interest rates may not be on the rise, but they are no longer falling, and thus in September at least, retirees did better. But for those on government benefits the picture remains grim with once again their cost of living growing by more than any other household.